Without Mandate, an Insurance ‘Death Spiral’?

If the Supreme Court strikes the Obama health care reform law’s requirement that all individuals buy health insurance or pay a penalty, but leaves intact popular provisions that forbid insurers from denying coverage to people who are sick or charging old people more than three times the premiums paid by the young, would the health care system collapse under the weight of too many patients and too little money?

That possible outcome of the case was explored yesterday during a Bloomberg Government program in Washington, D.C.

It’s the nightmare scenario for the insurance industry, which believes that young, healthy people will avoid buying insurance until they get sick — unless they’re forced to. And if only sick people have insurance, the industry argues, premiums will spiral until they’re unaffordable, a phenomenon known as adverse selection.

“The mandate is the only way to avoid adverse selection,” former Senate Majority Leader Tom Daschle said at the Bloomberg Government program.

Alternative policies that could encourage people to buy insurance without forcing them to “have no potential whatsoever,” Daschle said.

The Obama administration agrees with the insurance industry and Daschle, who was the president’s first choice to lead the Department of Health and Human Services. It has said that if the court tosses the mandate, other insurance reforms have to go with it.

Without the mandate, insurance premiums will be about 15-20 percent higher and about 16 million fewer people will have coverage, the Congressional Budget Office says. Adverse selection would be “mitigated somewhat” because the government will subsidize the cost of policies for low- and middle-income people and limit when people can enroll, the agency says.

Some states tried in the 1990s to prohibit insurer discrimination against the sick without requiring their residents to purchase insurance, with mixed results, according to a Bloomberg Government study released March 16.

New York and New Jersey experienced adverse selection, as insurance premiums in the states rose faster than the national average and people dropped their coverage. Policymakers in both states intervened to prevent a “death spiral” in their insurance markets, Bloomberg Government reported.

“New York is the hallmark example of what happens when you have all the market reforms and no mandate,” said Karen Ignagni, president and CEO of America’s Health Insurance Plans, a trade group, at the Bloomberg Government event.

But the Daschle-Obama-industry opinion isn’t a consensus. Congress should be thinking about alternatives to the mandate now, said Mark McClellan, a former administrator of the Centers for Medicare and Medicaid Services under President George W. Bush.

Possibilities that might work include “financial incentives” for insurers who enroll “high-risk” patients; using open-enrollment periods to discourage people from waiting until they’re sick to sign up; or limits on coverage of pre-existing conditions for people who don’t enroll when they’re first eligible, he said.